Section 56(2)(viib) Amendment’s Effects on Non- Resident Investors

Enigma of Angel Tax Provisions

Impact of Section 56(2)(viib) Amendment on Non- Resident Investors

When the Finance Act, 2023 amended Section 56(2)(viib) of the Income Tax Act, 1961 to make the angel tax provisions applicable to share application / premium received from non- resident investors as well, concerns were raised by several overseas stakeholders, who often obtain valuation reports at a discount to FMV in order to be able to exercise their anti- dilution price protection rights in case of down rounds.

CBDT provides relief for non-resident investors

Post that, the Central Board of Direct Taxes (CBDT) issued two notifications on May 24, 2023 to provide some welcome relief by: (a) notifying certain categories of non-residents from 21 countries whose investment would not be subject to angel tax and (b) extending the current reliefs for investment in DPIIT registered start- ups to non-residents as well.

CBDT Publishes Draft Amendments to Rule 11UA of Income Tax Rules, 1962

Further, on May 26, 2023, the CBDT published draft amendments to Rule 11UA of the Income Tax Rules, 1962, which inter alia provide for the following:

Five New Valuation Methods for Equity Shares

Five more valuation methods have been proposed for issue of equity shares to non- resident investors, i.e. Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Methods;

Price Matching Facility for Resident and Non-Resident Investors Proposed

Price matching facility for both resident and non- resident investors has been proposed, which provides that the price at which equity shares are issued to notified non-resident entities will be adopted as FMV for the purposes of investments by both resident and non- resident investors;

Proposed change in Rule 11UA

Currently, Rule 11UA requires a merchant banker’s report through DCF valuation as on the date of issue of shares, which period has been proposed to be changed to up to 90 days prior to the date of issue of equity shares.

Draft Rules For Public Comments

The Draft Rules had sought public comments till June 5, pursuant to which various representations have been made. 


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